UPDATE 3-Mexico September retail sales rise more than expected

Wed Nov 21, 2012 11:11am EST

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MEXICO CITY, Nov 21 (Reuters) - Mexican retail sales rose more than expected in September, damping fears that the global slowdown is dragging down consumption in Latin America's No. 2 economy.

Retail sales rose 1.0 percent in September from August, beating expectations in a Reuters poll for a 0.3 percent increase and just below the 1.1 percent rise notched in August from July, the national statistics office said on Wednesday.

The Mexican economy grew at a healthy clip in the first half of 2012, but the government has said it expects growth to ease in the second half, resulting in 3.5 to 4 percent growth for the year.

Mexico's economic growth slowed in the third quarter to its lowest pace in 1-1/2 years, recording a slim 0.5 percent expansion compared to the prior quarter.

But growth is still expected to outpace that of many other countries in the region, supporting consumer spending.

"The underlying growth, the month-on-month growth, is pretty strong ... We would expect retail sales to continue growing at that sort of pace," said David Rees, an economist at Capital Economics in London, who notes that the country has not seen the unsustainable credit expansion or commodities windfall that boosted consumption in other regional competitors.

Mexican consumer confidence rebounded in October after slumping for two months, supported by cooler inflation and falling unemployment, according to data released earlier this month.

Still, other analysts said the recent run of five straight months with inflation above 4 percent could hurt spending.

"Even though we have seen a decrease in inflation generally, it is still at high levels, which makes us think that household consumption could be limited," Banorte economist Alejandro Cervantes wrote in a note to clients.

Annual inflation eased in October off a 2-1/2 year high reached in September, backing policymakers' insistence that the September level was only temporary, even though the bank has warned it may hike rates if price pressures increase again.

Investors expect the Banco de Mexico to hold its benchmark interest rate steady at 4.5 percent through 2013 as it balances inflation against the risks from slowing global growth.

Retail sales in September adjusted for seasonal factors were up 3.8 percent from a year earlier, in line with expectations in a Reuters poll but decelerating from August.

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